Question

3. Elfco is in the business of making toys. A high percentage of its products are sold during November and December. Therefore, retailers need to have the toys in stock prior to November. The corporation produces on a relatively stable basis during the year in order to retain its skilled employees and minimize its investment in plant and equipment. The seasonal nature of its business requires a substantial capacity to store inventory.
The gross receivables balance at April 30, 2015, was $55,000, and the inventory balance was $250,000 on this date. Sales for the year ended April 30, 2016, totaled $5,000,000, and the cost of goods sold totaled $1,500,000.
Elfco uses a natural business year that ends on April 30. Inventory and accounts receivable data are given in the following table for the year ended April 30, 2016
Month	Gross Receivables	Inventory
May-15	$                                                60,000	Inventory
Jun-15	$                                                40,000	Inventory
Jul-15	$                                                50,000	Inventory
Aug-15	$                                                60,000	Inventory
Sep-15	$                                             200,000	Inventory
Oct-15	$                                             800,000	Inventory
Nov-15	$                                          1,500,000	Inventory
Dec-15	$                                          1,800,000	Inventory
Jan-16	$                                          1,000,000	Inventory
Feb-16	$                                             600,000	Inventory
Mar-16	$                                             200,000	Inventory
Apr-16	$                                                50,000	Inventory
At April 30, 2015	$                                                55,000	$                       250,000
Sales, year end at April 30, 2016	$                                          5,000,000
Cost of Goods Sold	$                                          1,500,000
C. Comment on the difference between the ratios computed in (a) and (b).		e.
D. Compute the days’ sales in receivables
E. Compute the days’ sales in inventory
F. How realistic are the days’ sales in receivables and the days’ sales in inventory that were com- puted in (d) and (e)?

Answer 1